Economists OK higher debt cap

The increase in the debt ceiling to $300 billion was creating more noise in the political realm than in the markets, economists said.

The budget announced that due to an uneven flow of revenues, within a year borrowing was likely to exceed the existing $250 billion debt ceiling, and therefore the government proposed amending the act to allow the value of bonds issued by the Australian Office of Financial Management to rise to $300 billion.

Shadow treasurer
Joe Hockey
seized on the increase yesterday.

“They want to increase the credit card and at the same time claim that they are living within their means. This is a significant mistruth from the Labor Party," Mr Hockey said.

HSBC’s Paul Bloxham disagreed. “Australia has a very low level of debt on issue. I just don’t think that it’s a big deal particularly," he said.

Mr Hockey wrote to the Treasurer on Monday seeking an assurance he would not include the amendment to the debt ceiling legislation in the normal appropriation bills, which the opposition, by convention, does not block in the parliament.

Mr Swan’s office did not respond to a request to find out how he would respond yesterday.

In the 2011-12 budget the government said the size of the bond market should be about 12 to 14 per cent of GDP. The figure was not re-iterated in 2012-13.

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Bank of America Merrill Lynch economist
Saul Eslake
said the value of the bond ceiling was equivalent to just over a fifth of total output and it was important to still have a liquid bond market.

“There is a real possibility that liquidity in the bond market could dry up, even though ostensibly there’s a lot of bonds on issue," Mr Eslake said, citing foreign central banks holding much of the issuance and not trading it.

Former treasurer
Peter Costello
paid net debt down to zero but maintained a bond market worth about $50 billion even through the surplus years thereafter.

The Office of Financial Management yesterday said it expected to issue $35 billion of Treasury Bonds in 2012-13, down from $58 billion this year.

Only $9 billion would be new issuances, down from $44 billion this year. The remainder was debt that needed to be rolled over.

The Government raises cash through bond issuance to cover its spending.

Treasurer
Wayne Swan
said yesterday the increase in the debt cap was “no big deal".